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Vol. 13, No. 23 Week of June 08, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

LNG license renewed

Nikiski export terminal gets extension; DOE says gas supplies adequate

Alan Bailey

Petroleum News

On June 3 the U.S. Department of Energy approved two more years of natural gas exports from Alaska’s Cook Inlet to Asia. The approval was in response to a request from Nikiski LNG plant owners ConocoPhillips and Marathon to extend the plant’s export license for two years, from April 1, 2009 to March 31, 2011.

The companies would be exporting 98.1 billion cubic feet of liquefied natural gas to Japan or other Pacific Rim countries during that time, DOE said in its announcement.

“Based on the evidence of record, DOE finds there are adequate supplies to meet both domestic and export demand during the proposed export timeframe and approval of the export license will not adversely affect domestic gas use in the Cook Inlet region,” DOE said in its order authorizing the license extension. “In addition, DOE finds the arguments made by the non-settling interveners regarding deliverability constraints and other economic and contractual issues do not alter the basic supply and demand balance for the Cook Inlet region, thus reinforcing the conclusion there are adequate supplies to meet both domestic and export demand during the proposed export timeframe.”

A blanket authorization for continued operation of the LNG terminal will enable the continuation of benefits that LNG exports bring to the Alaska economy and international trade, DOE said.

Alaska Gov. Sarah Palin praised the DOE decision.

“In these times of economic uncertainty, this is great news for the state and its residents,” Palin said. “This extension will secure a future for the LNG operation and is another step toward ensuring energy supplies and energy security for Alaska.”

State support

In January the state reached an agreement with the LNG plant owners that resulted in state support for the license extension. As part of that agreement, ConocoPhillips agreed to approve at least two wells for 2008 drilling and Marathon agreed to approve five wells for its 2008 program.

The companies also committed to sell Cook Inlet seismic and well data to other potential oil and gas explorers in the Cook Inlet region on a commercially reasonable basis to encourage exploration and development.

ConocoPhillips spokeswoman Natalie Knox Lowman confirmed June 4 that ConocoPhillips is moving forward with its drilling commitments as part of the agreement with the state.

“We have already started drilling at the Beluga River unit, with one well spud in the last week (May 31),” Lowman told Petroleum News. “A second well is also planned. In addition, we are mobilizing to drill three wells … from the North Cook Inlet unit platform, a development program that will continue into 2009.”

Lowman also referenced a concern that some people have expressed about the need for the LNG plant as a means of meeting gas deliverability requirements during peak gas demand for domestic and commercial heating — on cold winter days supplies to the LNG plant can be curtailed to enable a boost in short-term deliverability to local utilities.

“Continued operation of the plant means natural gas will be available for local utility markets, including Anchorage, in the event of supply interruptions or peak demand on cold winter days,” Lowman said.

Marathon told Petroleum News June 4 that it is pleased with the export license extension.

“This is good news for Southcentral Alaska for several reasons,” said Lee Warren, Marathon’s manager for external communications. “In addition to serving an important reliability role in the Cook Inlet by providing for the ability to divert natural gas for heating and electricity generation during peak demand periods, continued operation of the LNG facility has a positive impact on future investment in the development of regional gas supplies and provides employment and private and local government income in the Kenai Peninsula as well as royalty and tax income to the state.”

Response to interveners

In support of its decision, DOE reviewed comments made by Agrium, Chevron and Chugach Electric Association, interveners in the case.

Agrium, owner of the now-closed fertilizer plant at Nikiski, had argued that the LNG terminal would use gas that could otherwise supply the fertilizer plant, an industrial facility that Agrium said can contribute more to the local economy than the LNG plant. Agrium also asserted that in making their application for the LNG export license extension ConocoPhillips and Marathon had significantly understated gas demand from the fertilizer plant.

DOE questioned Agrium’s position, saying that the company “has not demonstrated that its decision to close its fertilizer plant … is the consequence of an actual supply shortfall, deliverability constraints at the production side of the local distribution system, infrastructure limits within the distribution network, or simply a business decision based on the market price of natural gas or, possibly, a number of other business judgments.”

“Whichever is the case, it is clear that Agrium has not established a reason to reject the applicants’ demand estimates,” DOE said.

Chugach Electric, concerned about potential shortfalls of gas for power generation, had asked that granting of the LNG license extension should be contingent on contractual commitments to gas supplies and gas deliverability in Anchorage and the Cook Inlet region.

In response, DOE said that the interveners in the case had not provided any new study to challenge ConocoPhillips and Marathon’s analysis of future Cook Inlet gas supplies. And “undisputed evidence of record indicates the total natural gas supply resources are distributed on a region-wide basis throughout the Cook Inlet region.”

“On this basis, we do not find that the non-settling interveners have shown that there is a domestic supply shortage in the Cook Inlet regions,” DOE said. “Rather, the applicants’ submissions provide a reasonable basis for concluding that local supplies are adequate to support the proposed export as well as meet local demand requirements during the term of the proposed authorization and beyond.”

Deliverability

DOE did accept that there are significant gas deliverability issues in the Cook Inlet region during peak demand on cold winter days. But there are conflicting claims regarding the reasons for gas deliverability curtailment, with differing views on who is responsible to meet deliverability needs — deliverability constraints may exist either within the Marathon and ConocoPhillips production facilities or within the local utility distribution networks, DOE said.

“We continue to believe that market forces will drive the installation of adequate delivery mechanisms and that the cost of such improvements will be appropriately addressed at a market-clearing price,” DOE said. “While allegations have been made regarding a high degree of concentration of economic power in the hands of a few producers of natural gas in the Cook Inlet region, we do not find the non-settling interveners leveling those charges have attempted to substantiate them in a meaningful way.”

Chevron’s intervention emanated from a concern about the company’s ownership position in two Cook Inlet fields operated by one or other of the LNG terminal owners. Gas production decisions relating to the needs of the LNG terminal could work to the detriment of Chevron’s gas supply commitments to its own customers, Chevron commented.

While DOE sympathized with Chevron’s concerns, the agency took a view that the LNG license renewal application was not an appropriate forum in which to address Chevron’s particular issue.

“Chevron has recourse to the courts under standard oil and gas law principles,” DOE said. “OFE (DOE Office of Fossil Energy) is not the proper jurisdictional forum for resolving these sorts of contractual disputes.”

Tesoro, owner of the Nikiski refinery, had originally intervened to oppose the LNG license extension but later negotiated an agreement with ConocoPhillips and Marathon. Enstar Natural Gas, the main gas utility in Southcentral Alaska, also withdrew its intervention in the case following negotiations with the two LNG terminal owners — Enstar had not opposed extending the license but had expressed concerns about future gas availability.



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